Collaboration vs Confrontation
By Nathaniel Fitzpatrick
Certainly, a conflicted feeling exists when it comes to real estate agents and appraisers. Recently, I attended a networking event, hosted by a local real estate brokerage. Being as sociable as possible, I introduced myself to a few real estate agents in attendance. Most were kind and engaged in interesting conversations. Although unconfirmed, some agents appeared to be surprised and perhaps a bit perturbed by the mere presence of a real estate appraiser amidst a crowd of real estate agents. As the evening progressed, friendly banter revealed a bitter taste towards real estate appraisers being held at fault for hampering market values.
Real Estate agents and appraisers are of high importance in the industry, and neither is more important than the other. Agents facilitate a complicated sales transaction which includes an analysis of the suggested list price. Appraisers demonstrate an ability to reconcile real estate values in a detailed report used to support a mortgage financed transaction. As each industry shares its similarities, their license requirements differ. The appraiser license is distinctly more difficult to obtain involving a lengthy apprenticeship. In the essence of license self-preservation, appraisers find themselves conservatively appraising homes. Since real estate agents’ duty is to their clients (primarily the seller), the emphasis is increasing values to satisfy their clients.
The protection of an agent’s license is irrelevant regarding valuation. On the other hand, the appraiser’s license is in jeopardy if the valuation is unreasonable. Agents and appraisers tend to quarrel when values are disputed. Who is to blame and what is at stake? Is the agent being unrealistic or the appraiser too conservative? The agent must reopen negotiations and may lose the sale. The appraiser puts his license at risk if the value is too high and reviews are ordered. Agents can oversee the fact that appraiser’s licenses are on the line, and appraisers do not understand buyers’ reasons for inflated offers.
The problem lies herein. Let’s analyze this hypothetical condition in a neighborhood where sales are prevalent although inventory of fully renovated homes are rare. No fully renovated home has sold in the subjects neighborhood in the past year. Values in the neighborhood top out at $500,000. Only one, fully renovated house, is listed in the neighborhood for $550,000. A buyer makes a full price offer, and to the dismay of the real estate agents, the appraisal comes back at $500,000! Everyone questions the appraiser’s selection of comps. The appraiser adds a conservative canned comment; “A major increase in value is not justifiable due to low inventory of similarly renovated homes. Sales are prevalent and the use of sales from outside the neighborhood would result in questionable reconciliation.” How can the appraiser justify a valuation at $550,000 when there are sufficient sales in the neighborhood indicating its $500,000 valuation? Controversially, what incentives does the appraiser have to stretch the value and risk a review that could ultimately result in disciplinary action? “Screech…. hit the breaks!” No wonder there is a confrontation. The appraiser completed his job, will get paid and thanks to Dodd Frank will not hear a peep from the lender. That is all fine and dandy, but everyone else is miffed, and the appraiser DID NOT do anyone justice. This is a difficult appraisal, and perhaps that appraiser knows the house is worth $550,000 due to the extensive upgrades but found it too difficult to justify. The appraiser is not confident his reconciliation will be adequate to alleviate the lender’s doubt.
Values are based off what the market will bear, and market value is described as what someone is willing to offer. Real estate values increase due to limited competition, gentrification and some positive economic factors. Real estate agents see improving markets because they are in the trenches. They work closely with buyers, sellers, and investors. Real estate appraisers are somewhat removed from that equation, which is a good thing, as they need to be to give their fair and unbiased opinion. Yet the appraiser and agent find it hard to sympathize with each others position. The disconnect took place when the appraiser in the aforementioned scenario neglected to give more weight to the subjects fully renovated condition and evaluate the sales from competing markets. Adequately citing his rebuttal may have gotten his client off his tail, but everyone else is left in the fray.
Referring to the scenario above; inventory must be considered as supply and demand demonstrates market reactions for rising prices. The subject is unique as fully renovated homes are rare in this neighborhood. This sale could give way to increasing values and the appraiser has the challenge of rationalizing the use of competing markets as comparable. The agent considered competing markets comparable and due to low inventory of renovated homes the buyer was willing to make a full price offer. Since sales are prevalent, the appraisal should include comps from within the neighborhood. However, the subjects condition is superior to homes in the neighborhood and sales from competing neighborhoods should be used. The final estimate of value supporting the sale price can lead to increasing values, which is positive, but the appraiser must clearly and descriptively detail the reasoning behind the use of such comps. The appraiser should attempt to mitigate the lenders doubt at the first submission, rather than addressing lenders concerns upon revision requests. This will lead to a convincing and rational appraisal report.
Agents and Appraiser can stand together, unite and realize they each have challenges. A difficult appraisal is daunting, and agents can empathize with the appraisers just as they do their clients. Each profession together must learn when it is necessary to justify a reasonable sale price and when it is not justifiable. We are professionals, and we want the best for our industry and clients. Our knowledge is ever increasing and mutually rewarding. Lenders can recognize increasing values, appraisers can justify gentrification, and agents can acknowledge perspective, to curb confrontation. When real estate appraisers and agents collaborate, optimal results are manifested.